Market volatility is a normal part of investing. For someone still working and contributing to retirement accounts, a downturn may be uncomfortable, but there is often time for the market to recover before those savings are needed. However, market downturns in retirement can be different story altogether.
When someone begins relying on their investments for monthly income, market losses can become more consequential. It is no longer just about how much an account gains or loses. It is also about how much money must be withdrawn while those investments are recovering.
This is an important retirement planning concept known as sequence-of-returns risk.
Why Market Downturns and Losses Can Have a Greater Impact in Retirement
Sequence-of-returns risk refers to the impact that the timing of investment gains and losses can have on a retirement portfolio, especially when withdrawals are being made.
Consider someone who retires with $500,000 in market-based investments and needs to withdraw $25,000 annually to supplement Social Security and other income.
If the portfolio experiences a 20% market decline, its value would fall to approximately $400,000 before withdrawals. Taking another $25,000 for living expenses would leave roughly $375,000.
At that point, the remaining portfolio would need to grow approximately 33% just to return to its original $500,000 balance, assuming no additional withdrawals.
This is a simplified example, but it illustrates an important problem: market losses combined with ongoing withdrawals can make recovery more difficult.
That is why the timing of market downturns can matter just as much as long-term investment performance.
The Difference Between Growing Money and Using Money
During working years, investors may be comfortable accepting market volatility in exchange for long-term growth potential. Retirement introduces a different priority: generating income that can support living expenses year after year.
That does not mean retirees should avoid the market entirely. Growth-oriented assets can still play an important role, particularly when planning for inflation and a retirement that could last several decades.
However, it may be helpful to separate money intended for long-term growth from money intended to help cover ongoing income needs.
Some retirees accomplish this through a combination of Social Security, pensions, cash reserves, conservative assets, and insurance-based retirement income strategies.
For those concerned about market exposure, fixed indexed annuities may be worth understanding as one possible component of a broader retirement income approach.
How Protected Income May Help
One approach to retirement income planning is to identify essential monthly expenses and compare them against more predictable income sources.
Social Security and pensions may already cover a portion of those needs. Certain annuities may also provide income features designed to help supplement retirement income, depending on the contract.
A fixed indexed annuity, for example, can provide protection from direct market-index losses in its interest-crediting strategy while offering potential interest earnings tied to an index. Some contracts also offer lifetime income options.
These benefits come with considerations, including surrender periods, withdrawal restrictions, interest-crediting limits, and potential rider costs. They are not appropriate for every retiree.
The objective is not to eliminate every risk or place all retirement savings into protected products. It is to understand how different assets may work together so that a market downturn does not unnecessarily disrupt the overall income strategy.
The Bottom Line
Market downturns are inevitable, but their impact on retirement income depends partly on how the retirement plan is structured.
For someone approaching or already enjoying retirement, the important question is not simply how much risk they are willing to take. It is how much of their retirement income depends on selling investments during unfavorable market conditions.
Understanding that distinction can help retirees evaluate the balance between income, growth, liquidity, and protection.
If you’re interested in learning how safe-money strategies may fit into a broader retirement income approach, explore our Fixed Indexed Annuities educational page or join us at an upcoming retirement workshop.
